Track-and-Trace Systems Are Still Working Out the Kinks

As a relatively new industry with unique needs, cannabis is at the forefront of technology, creating devices and software to advance efficiencies for cultivators, retailers, distributors, and other participants in the legal food chain. All that cutting-edge tech must work seamlessly and ceaselessly within each state’s regulatory environment. Within that zone of integration, wishful thinking encounters hard reality: As Slate noted in the headline for a September 2018 article about track-and-trace technology, “Software to Regulate Legal Marijuana Is Just as Error-prone as Other Government Software.”

Of the forty-four states that have legalized medical and/or adult-use cannabis, most currently or will mandate a comprehensive tracking system. The track-and-trace systems, often called seed-to-sale, are developed by third parties and licensed to the states, each of which has its own regulations affecting the specifics. The main purposes in every jurisdiction are to guarantee regulatory compliance throughout the food chain and ensure appropriate taxes are levied.

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To date, four companies have been awarded twenty-one state contracts for seed-to-sale tracking—Franwell/Metrc operates in eleven states, BioTrackTHC operates in seven states, MJ Freeway is in two states, and Kind Agrisoft is in one. Six contracts were awarded in 2018: Regulators in Washington D.C., Montana, Massachusetts, and Colorado chose Metrc, and Arkansas and North Dakota designated BioTrackTHC.

Obviously, not all states mandate the same tracking system, but whatever system is used, every state that has legalized cannabis actively employs track-and-trace to separate the “good players from the bad players,” as California Treasurer-elect Fiona Ma made clear to an audience of cannabis professionals during a recent trade event. In a regulatory environment where compliance infractions have led to lost licenses, track-and-trace software not only must work, but the people using it also must know how to work with the intricacies and idiosyncrasies of the relevant platform.

Thus far, states have had mixed results with software rollouts, to say the least. “In 2018, in addition to rejecting patients, glitches caused by high levels of user traffic left dispensaries in Maryland unable to make transactions, costing them significant amounts of money, retail managers said,” reported Slate. “In 2017, Oregon’s marijuana growers and distributors complained of spending valuable man-hours updating inventory in Metrc and dealing with slow connections during peak harvest season. MJ Freeway’s glitches in Pennsylvania and Washington have halted commerce for dispensaries, and the company has suffered multiple hacks and security breaches, plus a troubled, months-delayed launch in Washington earlier this year. Before inking a deal with MJ Freeway, Washington worked with BioTrackTHC for four years, but growers bemoaned performance issues and lacking functionality.”

In California, Metrc, an acronym for Marijuana Enforcement Tracking Reporting Compliance, is called CCTT-Metrc (for California Cannabis Track-and-Trace). The program is preparing for onboarding in a market that is blowing up. As Arcview Market Research and BDS Analytics noted in a report issued in June 2018, “By 2022, the global cannabis market could be worth as much as $32 billion, a threefold increase in just five years, with the U.S. expected to fuel much of that growth with an expected market value of $23.3 billion. Much of the current growth we’re seeing comes from California’s cannabis market, which is expected to exceed $5.1 billion market value in the next year after legalizing its recreational use on January 1, 2018.”

While not every state will experience the same growing pains with which California’s farmers, processors, distributors, and merchants are struggling, the state provides a good snapshot of what the future of retail may look like behind the scenes—and the view isn’t all that pretty.

CalOrigin Codes

CalOrigin

CCTT-Metrc is not the only track-and-trace player in California. Humboldt, Mendocino, and Yolo counties, along with the cities of Eureka, Arcata, and Rio Dell, separately contracted with SICPA Security LLC to provide seed-to-sale tracking via a program called CalOrigin. Humboldt County, which has participated in the program since 2016, in December reauthorized a six-month extension of the SICPA contract.

During the Humboldt Board of Supervisors hearing at which the extension passed, members of the cannabis community expressed near unanimous support for the program, which is overseen by the county’s agricultural commissioner, Jeff Dolf. While most speakers said the learning curve to master the software was daunting, its benefits in terms of protecting the Humboldt brand into the future and ensuring quality control of product throughout California’s complex distribution chain were tangible enough to warrant the expense.

But it was Dolf’s assessment that Metrc is unlikely to register any significant activity by late spring 2019 at the earliest that ensured the extension of the SICPA contract. “The lack of a viable system at the state level presents a potential six-month gap in the county’s ability to track cannabis at the local level,” he said.

SICPA and the county also addressed concerns about whether entering the same data into competing systems at the state and county levels would require duplicating effort. SICPA assured users no matter which system they select when they receive their permanent state licenses—by law, temporary licensees are not required to use the state’s track-and-trace system—they will have the option to use Metrc directly or continue to use CalOrigin, which will deliver data to and from Metrc.

Despite claims by California officials that CCTT-Metrc is ready for primetime, informed members of the industry are concerned the rollout will be rocky, at best, and require an extended period of acclimation. “The industry will see a year of chaos as the system experiences connectivity issues given the sheer amount of data and the unique aspects of the state’s cannabis program, including a distribution model that is unlike any other,” said attorney Pamela Epstein of Green Wise Consulting.

Big Stoned Brother

Dr. Juli Crockett, compliance director at consultancy MMLG, concurred the rollout will be messy. “It’s going to be a clunky start, because you are going to have these annual licensees coming onto track-and-trace and undergoing the CCTT system and interfacing with paper systems for people who are still on a temporary license,” she opined in a short video for The Future Cannabis Project.

“But, with the introduction of the provisional licensing program, even if every temporary license is extended for ninety days on December 31, you’re still looking at a very short window before every single operator who has a temporary license is going to be onboarding onto track-and-trace,” she said. “Once that is over, this theoretical wiggle room that a lot of businesses have had—whether it be how they’re implementing internal sampling, how they’re implementing all sorts of different processes—is going to have to fit into the very limited grid that is track-and-trace.”

That may be an understatement. The level of regulatory oversight provided by Metrc technology is impressive by any barometer. Just a few of its features include the ability to capture perpetual inventory quantities for each entity (i.e. you and me), track transfers between licensed premises, allow regulatory users to view all licensee activities captured in the system, and allow criminal investigators to streamline field enforcement and compliance activities associated with licensees.

But the software also provides powerful business tools, including central control of security through secure RFID tags, support for the auditing process from a series of exception reports, the means to report required inventories with minimal cost and investment, and the ability to aggregate data about cultivation, production, transportation, and sales of marijuana within the regulated model.

Inventory tracking alone is imperative for many growers. As one farmer put it to Humboldt supervisors, track-and-trace gives him the peace of mind to know that if his product is stolen while in the custody of a distributor, he will be able to prove the liability for that loss is theirs.

For Crockett, the mixed-bag reality of Metrc creates its own issues, with implementation just one facet of the onus imposed by track-and-trace. “The reporting is going to start being a lot more transparent in terms of the agencies and their relationships with other businesses,” she said. “[Track-and-trace] will fix a lot of things and streamline a lot of processes, but there are also going to be a lot of problems. The main point I’ve been trying to make with operators is that, operationally and internally, you must be ready for that process and those checkpoints ideally before your thirty days of onboarding, because if you are trying to implement your internal record-keeping process and your track-and-trace checkpoints within those thirty days, you’re in trouble. The time to practice is before you’re on, and for some people practice is over because they’ve gotten their annual license.”

Epstein of Green Wise Consulting stressed the same advice. “The best way for retailers to prepare for Metrc is to implement good reconciliation and retail practices,” she said. “Specifically, investing in developing procedures and understanding how to batch and conduct inventory management in the absence of an inventory system.

“There are three main areas,” she added. “Physical inventory controls—one small mistake can cost millions and create millions of problems. While the proposed permanent regulations require reconciliation every thirty days, an expansion from fourteen, this provides a false sense of security to operators. Reconciling every day or at least every few days ensures that if a discrepancy occurs, it is easily found and addressed. As bad data in results in bad data out on a continuous and compounding basis, the best way for retailers to arm themselves now is to identify and secure knowledgeable staff with continual trainings and be diligent in conducting frequent and continuous reconciliation audits.

“If the physical inventory is out of alignment, the digital inputs will not align,” she continued. “It is a matter of foundational accuracy, as discrepancies will have rippling effects that are hard, if not impossible, to eradicate, which can trigger an audit—and in the worst case, potentially jeopardize the license.”

Ultimately, she advised, “invest in a culture of compliance.”

So, what can operators expect to occur once they become one with the Borg…er, Metrc?

“Retailers will have varying experiences depending on their [point of sale software] provider,” said Epstein. “This can range from ‘white glove onboarding’ to autonomous implementation. Retailers should evaluate their POS provider in terms of existing relationships, knowledge of Metrc, and level of integration between the two, including the amount of support staff to assist during the difficult transition.

“Retailers should start fresh with initial starting inventory,” she added. “Inventory management and developing repetitive systems now prior to onboarding should be of the highest priority. Start pre-Metrc trainings for staff and ordering enough tags. Also start using inventory management and inputting all data and reconciliation procedures with [point-of-sale] systems so that, by the time Metrc is onboarded, the operator is on their third or fourth inventory cycle and the process feels natural.”

Track-and-trace is a process, a mandated responsibility that never ends, noted Crockett. “This is why in markets like Colorado, you see businesses that have multiple dedicated employees who only do track-and-trace, because the record-keeping onus is so immense when you start looking at all the processes that have to be logged,” she said. “It’s not impossible, and if you practice and have operational plans in place, and everybody is aware of the regulatory requirements of where you’re keeping these records, you’re going to be in much better shape in terms of having it be a part of the normal activity to know, ‘When this happens, you weigh it and enter it.’

“These jobs are critical in terms of who is entering that information,” she added. “These are instances of perjury and big consequences if someone is not entering the information correctly. Once information is entered into track-and-trace, it’s really, really difficult to revise it, so all of those processes that are supposed to have been happening anyway—because the regulatory onus was to keep all this on paper, at a minimum, all this time since the regulations were introduced—now the ante has been upped for those processes, which will be reported directly to track-and-trace and the agencies. It will be critical to make sure data entries are correct, because there are few opportunities for revision or correction of errors. They’re there, but whereas before it was an internal process when you were correcting your little mistakes, now it’s something that is going to be flagged and visible to the agencies every time you correct a mistake. You can imagine companies that seem to be making a lot of mistakes are probably going to trigger further inspections or audits.”

To address what is seen as a high bar for compliance, Green Wise Consulting has created a proprietary audit and compliance program designed “to help fill the void and provide the important second set of eyes between the regulators and a business’s daily operating procedures,” according to Epstein.

The need for a second pair of eyes is not theoretical, she said. “The days of informational audits by your friendly investigator are long over,” she said. “Now, they are coming armed with information, knowledge, and probing questions. As the dawn of enforcement is upon California, the industry need look no farther than Oregon to see the consequences of failure to prepare for investigations and audits.”

The Green Wise program would work similarly to a bank audit by utilizing “unannounced, in-person physical audits focused on the assessment of an operator’s people, [standard operating procedures], and equipment for compliance,” Epstein said. “After the physical audit, a report will be provided, and our compliance and legal departments can assist with curing any issues that arise. The audit program ensures that our operators are better prepared for state agency audits and better equipped to avoid state penalties and fines.”

The ERPs

For retailers in California, dealing with Metrc essentially means making the correct decision with respect to the enterprise resource planning (ERP) software used in their businesses. As anyone working in the space knows, the market is thick with ERP products of varying quality, some adapted off the shelf for use in the cannabis industry and some built from scratch to address the intricate demands of a regulated industry on steroids.

These products generally employ sophisticated technology designed to integrate several processes involving data collection, communications, record-keeping, inventory control, and every other function needed to run both the front-end and back-end of the business, but they also need to send all that data to the state on time and in the proper form. Failure at any point in the process results in potential liability for the business, not the software provider.

Treez is one such provider. Like so many other solutions in the industry, it was created by people running a cannabis business to meet a specific need. In this case, they were the operators of a Hayward, California, dispensary called Garden of Eden, which had been in operation since 2003. By 2009, Chief Financial Officer Shareef El-Sissi knew it was time for a change.

“I wanted to digitize the pen-and-paper methods used to manage the various workflows in the dispensary,” he said. “At the time, retailers were really operating as microbusinesses, doing much more than is allowed in the California retail environment today. We were using QuickBooks point of sale, and it fell short when trying to manage all the cannabis-specific workflows and associated records in a single system. We looked at the cannabis-specific software, but it was apparent these systems had been designed to check the boxes of Colorado’s seed-to-sale system and were too clunky for use in the emerging California marketplace. We needed something that fit the scale and operations of our business.”

Creating the solution took six years, but “we created a different class of software,” said El-Sissi. “We designed the system with not only a focus but a working knowledge of the cannabis retail operator and their specific needs. We would take on and manage the behind-the-scenes integration between our system of record and the state’s. This was very different than what had been seen up to this point in the space, and we intend to continue with our operator-centric focus as we move down the supply chain, completing the Treez ecosystem.”

Specific to track-and-trace, a term El-Sissi says is synonymous with batch tracking, Treez will help retailers stay compliant in three ways.

“First, Treez will assist in bringing in inventory from Metrc in a manner that promotes best practices by matching the physical manifest with a retailer’s Treez invoice,” said El-Sissi. “California is a unique onboarding situation for Metrc, with some of the supply chain transferring inventory using paper manifests and some transferring using Metrc manifests. This will present a unique challenge for retailers needing to not only create and upload their starting inventory, but also needing to regularly create and upload incoming inventory on an ongoing basis during the Metrc transition. Treez operators will have nearly no workflow disruption even with the non-Metrc transfers.

“Once the inventory is in Treez, keeping the physical counts, the Treez counts, and the Metrc counts in alignment will be a breeze using our inventory counting and reconciliation modules,” he added.

“The third and most high-touch area between Metrc and Treez will be reporting sales as they happen,” he concluded. “If an error occurs, Treez will work in the background to attempt to resolve the issues automatically. We expect the transition onto Metrc to be a heavy lift across the state, and we have ramped up our staff.”

Leaf Logix is another ERP solution making waves in the industry. Offering support for growers, distributors, processors, and retailers in recreational cannabis, medical cannabis, hemp, and CBD, the cloud-based software integrates with all regulatory compliance providers and assists with operational needs including POS, wholesale distribution, e-commerce, and reporting. At the end of 2018, the company’s client list spanned three continents and twenty-eight states as well as D.C. and Puerto Rico.

According to Eric Livergood, vice president of engineering for the company, adequate training will be pivotal to ensure a successful rollout of CCTT-Metrc. “Proactive observance of state requirements prior to absolute deadline will reduce issues and penalties,” he said. “Licensees should evaluate what their selected ERP is capable of in terms of working around areas of Metrc functionality. That is, to understand what their ERP can and cannot cover within Metrc and build their own POS accordingly.”

What sorts of features should retailers look for in an ERP? Livergood offered a list of desirables: ease of integration, secure data hosting, reliable up-time, intuitive functionality, financial reporting, state compliance, post-product support, integration with key industry vendors, and value-add capabilities.